What is 'Your' risk reward ratio?
This is something you have to think about when you first decide that you are going to stash some cash investing in shares. When you talk to most folk, they would say that their risk ratio is low ie. they want their capital to be safe and make a nice bit of interest on it. However when it comes to investing on the stock market, most of these same people buy 'penny shares'!!!! The highest risk type of share you can buy.
How do you assess your risk ratio. Well I am officially according to my advisor, 'very high risk ratio'. When it came to picking funds for my pension, I think I scared the advisor witless by only choosing Emerging markets to invest in. He kept suggesting safer alternatives for a portion of the funds and I kept saying....no I really want Latin America, Asia and if you can get your hands on it Russia that would be great. This was 10-12 years ago before Russia was even on some peoples radars. Never did get Russia (drat) in there on its own, but guess who has had a good return on their pension fund from the others.
Now - in truth what I have done is actually in a long term pension fund 'low risk' - confused? Well if you think about it the way I did. For someone of 30 (which I was at the time) high risk funds actually provide a low risk of getting a return, by having 35 years to provide that return on the investment. If on the other hand I had been 50-55 at the time, then yes it would have been extremely high risk to put everything into what was considered high risk funds as it wouldn't have had time to have the volitility of these markets and still provide me with a fund to retire on. As I get older I will gradually be moving over to safer funds like property, cash and precious metal funds or the like. Depends on what is considered to be safe by the time I get to that.
Ok so what does that have to do with investing in individual shares. Well a similar thing is true. If the money you are investing is money you cannot really afford to lose then a) forget it....lol or b) you should pick shares that are considered blue chips probably, 'cause your capital is likely to be protected to a degree by the fact that you will get regular dividend payment from these companies. The return might be a longer slower effort, but possibly safer (notice the probables and the possibles - its cause I'm not advising remember...lol).
When I started on the penny shares (and I do this if I go to the casino or bet on the races - no, I'm not an addicted gambler folks, although sometimes I wonder. lol) I looked at what my disposable income per month was and decided what I could afford to lose and that I would use half of that to try the markets.
With penny shares you can quite happily buy only £100 - £200 worth of shares in a company and still make a really good return. I paid for a holiday for 2 to Italy from a £1500 return on a £200 investment. Thanks Bulmers! (they got bought over). Shame all my investments weren't that lucky. Two of the companies I bought into have bitten the dust. RIP you Two. Yes luck......thats what a lot of investing in the penny share market is.
The point is, if you only buy a £100 or a few hundred pounds worth, depending on your disposable income and have already decided that you can afford to lose that money, then its a pretty safe bet really. Some you will win and some you will lose, but you might have some fun in the process. If you then end up buying more and more shares in the same company, as long as it is still with that disposable income then losing it all should never really be an issue.
Never be reliant on the money you are playing the stockmarket with. You are learning remember!! Losses are easy to rack up, but it's your mental attitude to the money that is important. Don't ever bet your family's lifestyle on the stockmarket.
